Page 1 of 6

FINANCIAL ACCOUNTING AND REPORTING

INVESTMENT IN ASSOCIATE
1. On January 1, 2019, Isabel Company purchased 15% of Hailey Company’s outstanding ordinary shares for P5,000,000. Isabel Company is
the largest single shareholder in Hailey and Isabel’s officers are majority of Hailey’s board of directors. Hailey reported net income of
P4,000,000 and paid dividends of P2,000,000. What should Isabel Company report as investment in Hailey Company?

a. 5,000,000
b. 5,600,000
c. 5,300,000
d. 4,700,000

2. On January 1, 2019 Ingrid Company acquired 25% of the outstanding ordinary shares of Noble Company for P10,000,000. The book value of
the acquired shares was P9,000,000. The excess of cost over book value was attributable to an unidentifiable intangible asset which was
undervalued on Noble’s balance sheet and which had an indefinite life. For the year ended December 31, 2019, Noble reported net income of
P5,000,000 and paid cash dividends of P2,000,000 on its ordinary shares and thereafter issued 10% stock dividend. What is the proper
carrying value of investment in associate at December 31, 2019?

a. 10,750,000
b. 10,000,000
c. 10,500,000
d. 11,250,000

3. On January 1, 2019, Inga Company purchased 40% of the outstanding ordinary shares of Farah Company paying P3,000,000 when the book
value of the net assets of Farah equaled P5,000,000. The difference was attributed to equipment, which had a book value of P1,500,000 and
a fair market value of P3,000,000, and to building, with a book value of P1,000,000 and a fair market value of P2,000,000. The remaining

m
useful life of the equipment and building was 5 years and 10 years, respectively. During 2019, Farah reported net income of P2,000,000 and

er as
paid dividends of P1,500,000. What is the net investment income to be recognized by Inga in 2019?

co
a. 800,000 eH w
b. 960,000
c. 640,000

o.
d. 680,000
rs e
ou urc

4. On July 1, 2019, Irma Company purchased 40% of the outstanding ordinary shares of Sunny Company for P5,000,000. On this date, Sunny’
net assets were P10,000,000 which approximated their fair values, except for equipment whose fair value exceeded its carrying amount by
P1,500,000. Any other excess is attributable to implied goodwill. The equipment has a remaining 5-year life. Sunny’ 2019 net income was
P4,000,000. The maximum amount, which could be included in Irma ‘2019 income before tax to reflect its equity in earnings of Sunny’, is
o

a. 1,600,000
aC s

b. 1,480,000
vi re

c. 740,000
d. 680,000

5. Ina Company bought 20% of Ira Company’s ordinary shares on January 1, 2019 for P5,000,000. The carrying amount of Ira’s net asset at
y

purchase date totaled P16,000,000. Fair value and carrying amount were the same for all items except for land and inventory, for which fair
ed d

values exceed their carrying amounts by P3,000,000 and P1,000,000 respectively. All of Ira’s inventory at the beginning of the year was
sold during 2019. Goodwill, if any has an indefinite life. During 2019, Ira reported net income of P5,500,000 and paid a P1,500,000 cash
ar stu

dividend. What amount should Ina report as investment in associate on December 31, 2019?

a. 5,800,000
b. 5,600,000
is

c. 5,000,000
d. 5,550,000
Th

6. On January 1, 2019, Pizza Company purchased 40% of the ordinary shares of Paula Company for P3,500,000 when the net assets of Paula
amounted to P7,000,000. At acquisition date, the carrying amounts of the identifiable assets and liabilities of Paula were equal to their fair
value, except for equipment for which the fair value was P1,500,000 greater than its carrying amount and inventory whose fair value was
P500,000 greater than its cost. The equipment has a remaining life of 4 years and the inventory was all sold during 2019. Paula Company
sh

reported net income of P4,000,000 for 2019 and paid no dividends during 2019. The maximum amount which could be included in Pizza’s
2019 income before tax to reflect Pizza’s equity in earnings of Paula Company should be

a. 1,350,000
b. 1,250,000
c. 1,600,000
d. 1,700,000

This study source was downloaded by 100000828959788 from CourseHero.com on 07-18-2021 20:07:25 GMT -05:00
December 3, 2020
https://www.coursehero.com/file/76277230/Financial-Assets-Part-2pdf/
 Page 2 of 6

7. Ella Company owns 100% of another entity’s preference share capital and 40% of its ordinary share capital. The investee’s share capital
outstanding at December 31, 2019 includes P5,000,000 of 10% cumulative preference share capital and P10,000,000 of ordinary share
capital. The investee reported net income of P6,000,000 for 2019. No dividend was declared for both preference and ordinary share in 2019.
What amount should be reported as investment income for 2019?

a. 5,500,000
b. 2,400,000
c. 2,200,000
d. 2,700,000

8. Immaculate Company acquired 30% of Cleo Company’s voting stock for P5,000,000 on January 1, 2018. Immaculate’s 30% interest in Cleo
gave Immaculate the ability to exercise significant influence over Cleo’s operating and financial policies. During 2018, Cleo earned
P2,000,000 and paid dividends of P500,000. Cleo reported earnings of P1,000,000 for the six months ended June 30, 2019, and P2,000,000
for the remainder of the year.

On July 1, 2019, Immaculate sold half of its investment in Cleo for P3,000,000, cash. The fair value of the remaining investment was
P3,100,000 on July 1, 2019 and P3,500,000 on December 31, 2019. The remaining investment is to be held as a nontrading investment and
measured at fair value through other comprehensive income. Cleo paid dividends of P600,000 on October 1, 2019. In its 2019 income
statement,

1. What amount should Immaculate report as gain from sale of half of its investment in Cleo?

a. 125,000
b. 80,000
c. 150,000
d. 190,000

m
er as
2. What amount of gain from remeasurement of the remaining investment should be reported for 2019?

co
a. 225,000 eH w
b. 625,000
c. 215,000

o.
d. 300,000
rs e
ou urc

9. Ira Company purchased 10% of Cherrie Company’s 500,000 outstanding shares of ordinary shares on January 1, 2019 for P1,000,000 and
appropriately classified this investment at fair value through other comprehensive income. The market value of this investment on December
31, 2019 is P1,200,000. On January 1, 2020, Ira purchased an additional 100,000 shares of Cherrie for P3,000,000. The book value of the
net assets of Cherrie on that date was P12,000,000. The fair value of the net assets of the investee is equal to the carrying amount except for
o

land and equipment whose fair value exceeded the carrying amount by P300,000 and P400,000, respectively. The remaining life of the
equipment is 4 years. Cherrie reported earnings of P3,000,000 for 2020 and paid dividends of P1,000,000.
aC s
vi re

1. What is the goodwill from the acquisition on January 1, 2020 under the “fair value approach”?

a. 390,000
y

b. 190,000
c. 150,000
ed d

d. 0
ar stu

2. What amount should Ira report as investment in Cherrie Company for the year ended December 31, 2020?

a. 4,570,000
b. 4,200,000
is

c. 4,770,000
d. 4,390,000
Th

10. On January 1, 2019, Andrei Company acquired 40% of the ordinary shares of an associate. On such date, assets and liabilities of the investee
were recorded at fair value and the acquisition showed that goodwill of P1,000,000 was acquired. The investee reported net income of
P8,000,000 for 2019.
sh

In December 2019, the investee sold inventory costing P3,000,000 to Andrei Company for P5,000,000. The inventory remained unsold by
Andrei Company on December 31, 2019.

On January 1, 2019, the investee sold an equipment to Andrei Company with carrying amount of P2,500,000 for P4,000,000. The remaining
life of the equipment is 5 years.

What amount of investment income should be reported by Andrei Company for 2019?

a. 1,920,000
b. 1,800,000
c. 3,200,000
d. 2,400,000

This study source was downloaded by 100000828959788 from CourseHero.com on 07-18-2021 20:07:25 GMT -05:00
December 3, 2020
https://www.coursehero.com/file/76277230/Financial-Assets-Part-2pdf/
 Page 3 of 6

INVESTMENT PROPERTY AND OTHER INVESTMENTS

1. Jalen Company provided the following information related to a noncurrent investment placed in trust as required by the underwriter of the
bonds:

Bond sinking fund – January 1, 2019 900,000

2019 additional investment 90,000
Dividends on investment 15,000
Interest revenue 30,000
Administration costs 5,000
Carrying amount of bonds payable 1,200,000

What is the bond sinking fund on December 31, 2019?

a. 1,035,000
b. 1,030,000
c. 1,000,000
d. 1,200,000

2. Jamil Company insured the life of its president for P2,000,000, the entity being the beneficiary of an ordinary life insurance policy. The annual
premium is P80,000 and the policy is dated January 1, 2016. The entity reported the following cash surrender value:

December 31, 2018 15,000

December 31, 2019 19,000

The president died on October 1, 2019 and the policy is settled on December 31, 2019. What amount should be reported as gain on life
insurance settlement for 2019?
a. 1,962,000

m
b. 2,000,000

er as
c. 1,961,000
d. 1,981,000

co
3.
eH w
On January 1, 2021 Josh Company purchased a P2,000,000 ordinary life policy on its president. Additional data for the year 2019 are:

o.
Cash surrender value, January 1 50,000
rs e
Cash surrender value, December 31 60,000
ou urc

Annual advance premium paid on January 1, 2019 100,000

Dividends received on July 1, 2019 10,000

Josh Company is the beneficiary under the life insurance policy. What is the life insurance expense for 2019?
o

a. 110,000
b. 100,000
aC s

c. 90,000
vi re

d. 80,000

4. In 2021 Janna Corporation purchased P5,000,000 life insurance policy on its president and chief executive officer, of which Janna is the
y

beneficiary. Information regarding the policy for 2019 is

ed d

Cash surrender value- January 1 100,000

Annual premium paid on January 1, 2019 200,000
ar stu

Dividends 20,000

The dividends were applied to increase the cash surrender value. If the life insurance expense reported by Janna in 2019 was P160,000,
what is the cash surrender value on December 31, 2019?
is

a. 140,000
b. 160,000
Th

c. 120,000
d. 200,000

5. Jeanine Company made an investment of P5,000,000 at 10% per annum compounded annually for 6 years. What is the amount of the
investment on the date of maturity?
sh

a. 8,860,000
b. 8,000,000
c. 9,745,000
d. 5,500,000

6. Jaycee Company made investment for 5 years at 12% per annum compounded semiannually to equal P7,164,000 on the date of maturity.
What amount must be deposited now at the compound interest to provide the desired sum? Round off future value factors to three decimal
places.
a. 4,000,000
b. 4,065,835
c. 1,432,800
d. 2,306,505

This study source was downloaded by 100000828959788 from CourseHero.com on 07-18-2021 20:07:25 GMT -05:00
December 3, 2020
https://www.coursehero.com/file/76277230/Financial-Assets-Part-2pdf/
 Page 4 of 6

7. On January 1, 2019, Jett Company adopted a plan to accumulate funds for a new building to be constructed beginning January 1, 2023 at an
estimated cost of P20,000,000. Jett Company intends to make four equal annual deposits in a fund beginning January 1, 2019 that will earn
interest at 12% compounded annually. Future value factors at 12% for 4 periods are:

Future value of an ordinary annuity 4.78

Future value of an annuity in advance 5.35

What is the annual deposit to the fund?

a. 5,000,000
b. 4,184,100
c. 3,738,318
d. 3,149,606

8. Jay-Anne Company and its subsidiaries provided the following properties owned by the group:

Land held by Jay-Anne for undetermined future use 2,000,000

Vacant building owned by Jay-Anne to be leased out under an operating lease 3,000,000
Property held by a division of Jay-Anne, engaged in real estate firm,
on the ordinary course of business 5,000,000
Property held by Jay-Anne for use in production 4,000,000
Property that is being developed for future use as investment property 2,500,000
Office of the building owned by a subsidiary of Jay-Anne and for which
the subsidiary provides security and maintenance services to the lessees 1,000,000
Equipment leased by Jay-Anne to a subsidiary 1,500,000
Property being constructed on behalf of another party 500,000
Real estate held for capital appreciation 3,500,000

In the consolidated statement of financial position of Jay-Anne Company and its subsidiaries, what total amount should be shown as

m
investment property?

er as
a. 12,000,000
b. 10,000,000

co
c. 9,000,000 eH w
d. 7,500,000

o.
9. Gerald Company purchased an investment property on January 1, 2017 at a cost of P2,200,000. The property had a useful life of 40 years
rs e
and on December 31, 2018 had a fair value of P3,000,000. On December 31, 2019 the property was sold for net proceeds of P2,900,000. The
ou urc

entity used the cost model to account for investment property. What is the gain or loss to be recognized for 2019 regarding the disposal of
the property?
a. 865,000 gain
b. 810,000 gain
o

c. 100,000 loss
d. 700,000 gain
aC s
vi re

10. Molly Company owned three investment properties. Details of the properties are as follows:

Fair value December 31, 2019 Fair value December 31, 2020
y

Initial cost
Property 1 2,700,000 3,200,000 3,500,000
ed d

Property 2 3,450,000 3,000,000 2,800,000

Property 3 3,300,000 3,900,000 3,400,000
ar stu

Each property had an estimated useful life of 50 years. The accounting policy is to use the fair value model for investment property. What is
the gain or loss to be recognized for the year ended December 31, 2020?
a. 250,000 loss
is

b. 400,000 loss
c. 300,000 gain
Th

d. 700,000 loss
sh

This study source was downloaded by 100000828959788 from CourseHero.com on 07-18-2021 20:07:25 GMT -05:00
December 3, 2020
https://www.coursehero.com/file/76277230/Financial-Assets-Part-2pdf/
 Page 5 of 6

DERIVATIVES
1. Marianne Company is a golf course developer that constructs approximately 5 courses each year. On July 1, 2019, Marianne has agreed to
buy 5,000 trees on March 1, 2020 to be planted in the courses it intends to build. In recent years, the price of trees has fluctuated wildly.

To protect itself from the variability of the market price of trees, Marianne Company entered into a forward contract as a cash flow hedge with
a reputable bank for the purchase of 5,000 trees on March 1, 2020 at a strike price of P1,500 per tree.

If the market price on March 1, 2020 is more than P1,500, the difference is paid by the bank to Marianne. On the other hand, if the market
price is less than P1,500, Marianne will pay the difference to the bank. The market prices of the trees on December 31, 2019 and March 1,
2020 are P1,700 and P1,800 respectively.

1. What is the forward contract receivable or payable to be recognized on December 31, 2019?
a. 1,000,000 receivable
b. 1,000,000 payable
c. 1,500,000 receivable
d. 1,500,000 payable

2. What was the total amount exchange by Marianne with the bank on March 1, 2020?
a. 1,000,000 receipt
b. 1,000,000 payment
c. 1,500,000 receipt
d. 1,500,000 payment

2. Missy Company requires 50,000 pounds of copper each month in its operations. To eliminate the price risk associated with copper
purchases, on December 1, 2019. Missy entered into a futures contract as a cash flow hedge to buy 50,000 pounds of copper on March 1,
2020. The futures strike price is P100 per pound.

m
er as
The futures contract is managed through an exchange, so Missy does not know the other party on the other side of the contract. As with
most derivative contracts, this futures contract is settled by an exchange of cash on March 1, 2020 based on the price of copper on that date.

co
eH w
The price of copper on December 31, 2019 is P90 per pound, while the price of copper on the date of delivery is P85.

o.
1. Missy shall recognize a futures contract payable on December 31, 2019 at
rs e
a. 1,000,000
b. 500,000
ou urc

c. 750,000
d. 0

2. What was the total amount exchange by Missy in settlement of the futures contract on March 1, 2020?
o

a. 500,000 receipt
aC s

b. 500,000 payment
c. 750,000 receipt
vi re

d. 750,000 payment

3. Mary Company makes colorful 10% cotton shirts that are very popular among sophisticated business executives. Mary uses 50,000 pounds
y

of cotton each month in its production process. On December 1, 2019, Mary purchased a call option as a cash flow hedge to buy 50,000
pounds of cotton on March 1, 2020. The option exercise price is P50 per pound. Mary paid P50,000 for the call option. This derivative
ed d

option contract means that if the market price is higher than P50, Mary can exercise the option and buy the asset at the fixed option price of
ar stu

P50. If the market price is lower than P50 Mary can throw away the option and buy the asset at the cheaper price. As the most derivative
contracts, this option contract will be settled by an exchange of cash on March 1, 2020 based on the price of cotton on that date. If the price
of cotton on December 31, 2019 is P65 per pound and P70 on March 1, 2020, Mary will recognize the following amounts:

1. What is the receivable on the call option on December 31, 2019?

is

a. 750,000 c. 1,000,000
b. 650,000 d. 0
Th

2. What is the gain on the call option to be recognized in 2020?

a. 750,000 c. 950,000
b. 1,000,000 d. 650,000
sh

3. If the price of the cotton on March 1, 2020 is P45 per pound, how much is the loss on the call option to be recorded by Mary?
a. 50,000 c. 300,000
b. 250,000 d. 200,000

4. On January 1, 2020, Martha Company entered into a two-year P4,000,000 “Variable Interest Rate Loan” at the prevailing interest rate of
12%. The 2021 interest payment will be equal to the prevailing interest rate on January 1, 2021. The principal loan is payable on December
31, 2021 and the interest is payable on December 31 of each year. During 2020, Martha Company entered into a “receive variable, pay fixed”
interest swap agreement as a cash flow hedge with a speculator bank at the prevailing rate of interest of 12%. This derivative contract
means, that if the rate is higher than 12%, Martha will receive an interest rate swap payment equal to the difference in rate times the principal
of the loan and will pay the bank an equivalent amount if the rate is lower than 12% on January 1, 2022. If the prevailing interest rate on
January 1, 2021 is 15% and the present value of 1 at 15% for 1 period is .870. What is the derivative asset or liability to be recognized by
Martha on December 31, 2020?
a. 104,400 receivable
b. 104,400 payable
c. 120,000 receivable
d. 120,000 payable

This study source was downloaded by 100000828959788 from CourseHero.com on 07-18-2021 20:07:25 GMT -05:00
December 3, 2020
https://www.coursehero.com/file/76277230/Financial-Assets-Part-2pdf/
 Page 6 of 6

5. On January 1, 2019, Melissa Company received a 4-year variable interest rate loan of P5,000,000 with interest payment at the end of each
year and the principal to be repaid on December 31, 2022. The interest rate for 2019 is 10% and the rate in each succeeding year is equal to
market interest rate on January 1 of each year.

In connection with the loan, Melissa Company entered into an interest rate swap agreement as a cash flow hedge with another financial
institution to the effect that Melissa will receive a swap payment if the interest on January 1 is more than 10% and will make a swap payment if
the interest is less than 10%. The swap payments are made at the end of the year.

On January 1, 2020, the market rate of interest is 14% and on January 1, 2021, the market rate of interest is 12%.

The present value of an ordinary annuity of 1 at 14% for three periods is 2.32 and the present value of an ordinary annuity of 1 at 12% for two
periods is 1.69.

1. What is the interest rate swap receivable December 31, 2019?

a. 169,000
b. 464,000
c. 264,000
d. 338,000

2. What is the interest rate swap receivable December 31, 2020?

a. 169,000
b. 464,000
c. 264,000
d. 338,000

6. Merylin Company has the Philippine peso as its functional currency. On October 1, 2020, the company expects to purchase goods from the

m
USA for $50,000 on March 31, 2021. Accordingly, the company is exposed to a foreign currency risk. If the dollar increases before the

er as
purchase takes place, the company will have to pay more pesos to obtain the $50,000 that it will have to pay for the goods. On October 1,
2020, Merylin entered into a foreign currency forward contract with a bank speculator to purchase $50,000 in six months for a fixed amount of

co
P2,500,000 or P50 to $1. This forward currency contract is designated as a cash flow hedge of the company’s exposure to increase in dollar
eH w
exchange rate. On December 31, 2020, the exchange rate is P52 to $1 and on March 31, 2021, the exchange rate is P53 to $1. What is the
derivative asset to be reported by Merylin Company on December 31, 2020?

o.
rs e
a. 50,000
ou urc

b. 150,000
c. 100,000
d. 0
o
aC s

- - END - -
vi re
y
ed d
ar stu
is
Th
sh

This study source was downloaded by 100000828959788 from CourseHero.com on 07-18-2021 20:07:25 GMT -05:00
December 3, 2020
https://www.coursehero.com/file/76277230/Financial-Assets-Part-2pdf/

Powered by TCPDF (www.tcpdf.org)